Tax credits are paid based on estimates given by claimants for their income for the year ahead, with HM Revenue & Customs responsible for reclaiming any overpayments at the end of the year.

'Open to abuse'

"In the years between 2003 and 2010, Labour spent a staggering £171bn on tax credits, contributing to a 60% rise in the welfare bill," Mr Duncan Smith said.

The system, he said, "was wide open to abuse".

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Media captionShadow Treasury minister Catherine McKinnell: "We have to tackle tax and benefit fraud and error at every level"

The so-called "income disregard" - the amount a person's income can rise before their claim must be reassessed - was raised from £2,500 to £25,000 in 2008.

"It will come as no surprise therefore that fraudsters from around the world targeted this benefit for personal gain," Mr Duncan Smith said.

The government is planning to slash the disregard to £5,000.

Mr Duncan Smith also said that officials carried out far fewer checks on tax credit claims than benefit claims, despite estimates that one in 12 tax credit claims were incorrect or fraudulent, compared with fewer than one in 25 benefit claims.

The government believes there is more than £300m to be saved over the next three years by reducing fraud and error, and also wants to reclaim £400m in unpaid debts.

"Even for those in genuine need of support, tax credits were not fit for purpose," Mr Duncan Smith said.

"They were haemorrhaging money while at the same time trapping people in a system where those trying hard to increase the amount of hours they worked weren't necessarily better off."

'Disaster in the making'

Mr Duncan Smith is leading an overhaul of the welfare system that will see a number of benefits replaced by a new universal credit that is designed, he says, "to make work pay at each and every hour".

He also accused previous Labour governments of boosting tax credit payments ahead of the last two general elections in "an attempt to gain short-term popularity".

"It knew what it was doing - this was a calculated attempt to win votes," he said.

Catherine McKinnell, Labour shadow Treasury minister, said: "This cheap political attack on the whole tax credits system will not succeed in acting as cover for the government's cuts to tax credits which will hit millions of striving working families next year.

"Iain Duncan Smith should start focusing on sorting out his new universal credit, which even his own cabinet ministers are warning is 'a disaster in the making'."